CAPA Live – December 2020: Finally, a light at the end of a very long tunnel
December 2020 is a remarkable time, because we can now start to talk in positive terms about having a vaccine for this dreadful COVID-19 predicament.
The key questions for the airline industry are; 'What happens next?' and 'What is the impact going to be of this and where do we go from here?'
Previewing this month's CAPA Live edition, which commences at 0100 GMT on 09-Dec-2020, CAPA Chairman Emeritus Peter Harbison said, "It's important to recognise the fact that the news on the vaccines reflects an amazing feat of science, to go from a gene sequence on 10th January to a vaccine by the 10th November. It was probably never believed that anybody could do this when we talked about it earlier in the year, but it's been done and it's remarkable. The rollout goals are really very aggressive too - and I suppose that's reasonable having been able to get to this state so quickly".
- The aviation industry is cautiously optimistic about the availability of COVID-19 vaccines, but challenges lie ahead.
- Second or third waves of the virus are expected in the US and Europe, leading to a long and difficult winter for airlines.
- Cash burn is a major concern, with IATA forecasting another 12 months of losses before profitability returns.
- The industry will accumulate around USD 200 billion in additional debt, leading to significant interest payments.
- The economic recession caused by the pandemic will have a lasting impact on consumer purchasing power and premium travel demand.
- The recovery of international markets depends on the development of interim travel solutions and the successful deployment of vaccines, but challenges in production, distribution, and politics remain.
Vaccines are coming, but first, a long dark winter
But it's not going to be plain sailing. We're looking at really big second or third or even extended first waves occurring, in America particularly, and in Europe. There's the continuing tug of war between looking after the economy and looking after the populace.
For the US and Western Europe, it's going to get a lot worse before it gets better.
And for airlines getting from here to there is a question of 'How long can you hold your breath in terms of cash burn?'
IATA is forecasting another 12 months of cash burn, until we start to see an industry which is profitable again. And that has implications because it has got to be planned for. We cannot just continue to hold our breath and hope it's going to go away.
And during this coming 12-month period we're going to have something like USD200 billion of additional debt added by the industry. Now, just the interest payments on the industry's debt load will be greater than most of the annual profits for the entire aviation industry over the last 20-30 years.
So there are going to be some really serious headwinds, however quickly we can get the vaccine operational and markets opened up. It's going to hurt, and we've got to have contingencies in place to prepare for that, and/or see some radical changes in the industry.
The economic recession we're going into will be the worst since the Great Depression
The OECD warns that the median advanced and emerging market economy could have lost the equivalent of four to five years of per capita real income growth by 2022.
Now, that's not just a 'side issue'. That does say a lot about what the purchasing power of likely consumers of the aviation product is going to be - it will be impacted.
It is also going to be hard for airlines to get the premium traffic flying again, to get large numbers of what has become, particularly in Asia, a very price sensitive market.
IATA's median baseline traffic forecast sees the industry overall in terms of global RPKs not getting back until 2025 or beyond.
And at the lower end of IATA's prediction - the forecast sees 2010 levels of demand still persisting right through 2024. And on the top range, almost back to the baseline projection.
So much depends on what happens in international markets
If we're going to regrow the international markets, there has got to be some intermediate period before the vaccines are fully effective. Some strong interim capability of allowing people to travel between nations. And that means crossing borders in some way that's acceptable to each of the countries involved.
Then there is the saying, 'but there's a massive pent-up demand for travel'. Yes, of course there is. We haven't been travelling internationally since early 2020, but there's also a large proportion of the passenger cohort that will remain fearful well into 2021 and even beyond, even with the vaccine and any alignment on procedures and processes in the travel chain.
We can't rely on the vaccine as the saviour for the industry
IATA's forecasts are based on the expectation that the vaccines will be deployed in the second half of 2021 on a wide scale. There's still a lot of production and distribution issues that have to be gone through, and add to that, inevitably, a lot of political issues too. In terms of rollout of the vaccine, it will be lumpy between different emerging and emerged markets.
As a result, government support or progress on the use of testing to accelerate market opening will be critical for the survival of airlines in many regions over the next six to nine months.
Peter Harbison's keynote address, 'Outlook 2021' will be screened at 1300 GMT on Wednesday 09-Dec-2020. Register now at this link.